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This chapter sets out in greater detail what the authors think about the dynamic forces emanating from the emergence of China and Asia as major players in world capital and foreign exchange markets. Conventional analyses have been based for several years on the assertion that the Bretton Woods II system cannot hold together for much longer. This may or may not turn out to be correct, but it does not offer any guidance if the system does survive for an extended time period. A framework is developed that also provides a guide to the dynamics of the system following a variety of changes in the...

This chapter sets out in greater detail what the authors think about the dynamic forces emanating from the emergence of China and Asia as major players in world capital and foreign exchange markets. Conventional analyses have been based for several years on the assertion that the Bretton Woods II system cannot hold together for much longer. This may or may not turn out to be correct, but it does not offer any guidance if the system does survive for an extended time period. A framework is developed that also provides a guide to the dynamics of the system following a variety of changes in the economic environment. The analysis leans on four assumptions. (1) Asian financial markets are poorly integrated with the other two regions because of capital controls and the threat of sovereign interference with capital flows. (2) The United States and Euroland financial markets, in contrast, are very well integrated and their respective assets are very close substitutes. (3) The dominant change in the economic environment that is driving the main features of the world economy is the rapid growth of savings rates and the level of savings in Asia and their exportation to the rest of the world. (4) The United States and Euroland differ in their capacities to utilize Asian savings, with the United States having a much greater absorptive capacity.